BOE's Carney Issues Stark Warning on Brexit Risks -- Update

By Jason Douglas Features Dow Jones Newswires

Bank of England Gov. Mark Carney on Tuesday issued his clearest warning yet that a disorderly Brexit would pose a major risk to the European economy and not just the U.K.

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In testimony to lawmakers in the U.K. Parliament, Mr. Carney said European Union policy makers are only now beginning to understand the magnitude of the financial-stability risks that could arise if the U.K. crashes out the EU without a deal.

He listed a range of possible threats, including the risk that legal contracts underpinning trillions of euros of derivatives become null and void and British insurers become unable to pay out to European customers. European banks might be left unable to operate in the U.K. without setting up a dedicated subsidiary, he said.

"These issues are bigger for Europe than they are for us," he said. Mr. Carney said the potential problems for the financial sector mean it is essential that negotiators reach a deal on the terms of the U.K.'s exit and agree a transition period to allow firms and households to prepare for Brexit.

"It is absolutely in the interests of the EU27 to have a transition agreement," he said, referring to the EU's 27 member states other than the U.K.

The BOE governor's warning comes after Prime Minister Theresa May failed to achieve any breakthrough over stalled Brexit talks during a dinner Monday with top EU officials in Brussels.

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A fifth round of talks ended last week with European officials saying that progress is still insufficient for talks to move to the next phase. The EU has said it first wants to settle the divorce--meaning Britain's exit bill, the rights of EU citizens living in the U.K. and the border between Northern Ireland and Ireland--before it will agree to talk about its future relationship with the U.K.

EU leaders meeting in Brussels on Thursday and Friday are likely to say they are willing to negotiators a green light to move on to trade and transition talks in December, if enough progress is achieved on all three areas by then.

Mr. Carney criticized EU plans to require the clearing of financial-market trades in euros to occur in the EU after Brexit. Most currently takes place in London. Mr. Carney said such a move would push up the financing costs for EU businesses and households.

Write to Jason Douglas at jason.douglas@wsj.com

LONDON -- Bank of England Gov. Mark Carney on Tuesday issued his clearest warning yet that a disorderly Brexit would pose a major risk to the European economy and not just the U.K.

In testimony to lawmakers in the U.K. Parliament, Mr. Carney said European Union policy makers are only now beginning to understand the magnitude of the financial-stability risks that could arise if the U.K. crashes out the EU without a deal.

"I think that there's a learning process under way on the scale of some of the financial stability issues," Mr. Carney said. He listed a range of possible threats, including the risk that legal contracts underpinning trillions of euros of derivatives become null and void and British insurers become unable to pay out to European customers. European banks might be left unable to operate in the U.K. without setting up a dedicated subsidiary, he said.

He added that in the event no agreement on divorce is reached then the U.K. will emerge after Brexit in 2019 "long financial services," with the EU short of capital, collateral and people relative to London.

"The entire economic impacts are greater for the U.K. but...from a financial stability perspective they are greater for the EU than for the U.K.," he said. He argued the potential problems for the financial sector mean it is essential that negotiators reach a deal on the terms of the U.K.'s exit and agree a transition period to allow firms and households to prepare for Brexit.

"It is absolutely in the interests of the EU27 to have a transition agreement," he said, referring to the EU's 27 member states other than the U.K.

European officials have tended to play down the risks of Brexit to the EU, saying any impact will be dwarfed by the effect on the U.K. European Central Bank President Mario Draghi in September testimony to the European Parliament said with enough time, "the risks are going to be manageable."

The BOE governor's warning comes after Prime Minister Theresa May failed to achieve any breakthrough over stalled Brexit talks during a dinner Monday with top EU officials in Brussels.

A fifth round of talks ended last week with European officials saying that progress is still insufficient for talks to move to the next phase. The EU has said it first wants to settle the divorce -- meaning Britain's exit bill, the rights of EU citizens living in the U.K. and the border between Northern Ireland and Ireland -- before it will agree to talk about its future relationship with the U.K.

EU leaders meeting in Brussels on Thursday and Friday are likely to say they are willing to give negotiators a green light to move on to trade and transition talks in December, if enough progress is achieved on all three areas by then.

Mr. Carney criticized EU plans to require the clearing of financial-market trades in euros to occur in the EU after Brexit. Most currently take place in London. Mr. Carney said such a move would push up the financing costs for EU businesses and households.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

October 17, 2017 12:58 ET (16:58 GMT)